Have container rates turned?

Monday, July 01, 2013

After declining for more than a year, the Shanghai Containerized Freight Index (SCFI) spiked sharply higher on Friday, apparently in anticipation of general rate increases (GRIs) that carriers have announced for July 1.
The SCFI, a weighted index of estimated spot rates from Shanghai to 15 parts of the world as estimated each week by a panel of shipping lines and freight forwarders, had fallen from about 1,500 last May to 927.53 on June 21.
Last Friday, the index climbed 205.61 points to 1133.41. (See the latest weekly numbers here, as well as a chart of the Shanghai Index over the past two years.)
The Shanghai index showed a particularly sharp increase in spot rates on the Shanghai to North Europe route—increasing $895 per TEU or 174 percent from $514 to $1,409 per TEU.
The rate from Shanghai to the U.S. West Coast was also up, $269 or 15 percent from $1,845 to $2,114 per 40-foot container. The rate from Shanghai to the U.S. East Coast was up $377 or 13 percent from $2984 to $3361 per 40-foot container.
Before Friday’s announcement, one executive told American Shipper that rates had been dropping quickly on the transpacific, even on contracts whose ink had hardly dried.
For example, one carrier dropped its rate $100 to less than $1,600 on high cube 40-foot boxes on the eastbound transpacific on a contract that had just been concluded on June 1.
More generally, Martin Dixon, research manager for freight rate benchmarking at London-based Drewry, said many transpacific shippers have moved away from the traditional May-to-May seasonal contracting “to an anniversary that better suits their own business.”
Since many of those contracts were signed at the beginning of the calendar year when spot rates were higher, many shippers went back to carriers during the first half of this year and “asked for and succeeded in getting rate reductions.”
Instead of being pleased with such low rates, some shippers are growing concerned, fearing a reprise of what happened in late 2009 and early 2010, when many carriers withdrew substantial amounts of capacity and shortages of space occurred.
“I want to go on vacation and I don’t want to start seeing emails that say ‘no space unless you pay another 500 bucks,’” said an intermediary who did not want to be identified. “When I see rates drop this quickly and carriers panic, it kind of makes me think what’s next?”
Dave Akers, chief executive officer of Worldwide Logistics Associates which manages the Toy Shippers Association, International Housewares Shippers Association, and National Customs Brokers and Forwarders Association of America Shippers Association, said his firm had “serious concerns about rates coming down. We have situations where NVOs are going to our members and saying they have better rates now.”
He also was concerned about a possible repeat of 2009-2010.
“It could happen, there's a lot of capacity coming on board. Even though we have seen some increases with our toy shippers and our houseware shippers, it’s not as big an increase as the shipping lines had forecast,” he said.
The increase in the SCFI came just days before a recommended increase by members of the Transpacific Stabilization Agreement. In May, the 15 members of the TSA recommended a GRI of $400 per 40-foot container on July 1 for cargo moving from the Far East to the U.S. West Coast and $600 per 40-foot container to other destinations.
In the Asia-Europe trade, carriers had also planned major rate increases. For example, on May 14 Hapag-Lloyd announced a $1,000 per TEU increase on July 1.
“Carriers have pulled off the GRI trick once again,” said Clarkson Securities Ltd. in its weekly ClarksonBoxClever report. “We will now see just how strong some rate agreements are as the carriers will be desperate to book cargo at these higher, profit making levels.
“The other side of the coin is, of course, whether GRIs will stick in the first place as the skipped sailings and discipline supporting this move may disappear when the lure of revenue is there. Indeed, some shippers are reporting longer validity quotes being offered as the spectre of over capacity refuses to go away,” London-based Clarkson added.
Dixon of Drewry said freight rates have been declining on the transpacific eastbound and other routes “principally because there's too much capacity in the market. And there's also an element of fear amongst carriers at the amount of new capacity coming on and the fear as to what this may mean for freight rates and profitability.
“So we've seen freight rates fall at a much faster rate than would be suggested by supply and demand dynamics alone. But clearly carriers have a determination to try to address that,” he said.
“We're seeing that obviously on the Asia-Europe trade," Dixon explained. "There's a major impetus from the carriers to force rates up there. The early indications from the Shanghai Shipping Exchange are that that GRI has been quite successful, which is what we anticipated.
“The big question is always how sustainable these rate rises are going to be without a corresponding correction to capacity,” he said.
“On the transpacific, we do expect spot rates to rise as a result of the GRI, but again the question is how sustainable that rise will prove to be
because demand growth is still very sluggish. There is still too much capacity on the trade. While carriers are attempting to control that to some extent through the use of skipped sailings we don't think that that practice alone will be sufficient to support freight rate stability,” Dixon said.
Drewry estimates the size of the idle fleet is not much more than 3 percent, and Dixon said that increase is very low in relationship to the overall amount of new capacity coming in.
He said that “history has shown very clearly when the carrier do take action and lay up ships that tends to support a rise in rates and return to profitability. But the problem is: Who's going to move first? And who's prepared to give up market share to do that? Nobody wants to move first, and nobody wants to up any share.”
Because many carriers have new ships still to be delivered, “if they give up share now, it is going make it harder for them to fill these ships when they become available. So at the moment there is a reluctance of any of the carriers to make that first move,” he said.
Dixon said Drewry believes carriers need to collectively withdraw at least two service strings between Asia and Europe trade “in order to bring it back to some kind of stability of freight rates.”
Aker said it is still too early to tell if increased volumes could help carriers stabilize freight rates later this year. He said he's seeing a 12 percent increase in volumes, but is not sure if that is because more cargo is being shipped earlier in the year or whether volumes will be substantially higher than in 2012. - Chris Dupin